Cisco Ending Relationship With ZTE in Light of Iran Claims

Networking giant Cisco Systems reportedly is ending a seven-year relationship with Chinese tech vendor ZTE following an investigation that found that ZTE had sold Cisco networking products to Iran.

Cisco began its investigation after news reports in April and May found that ZTE had been selling computer technology from Cisco and other U.S. vendors to the largest telecommunications company in Iran in violation of U.S. sanctions again the Middle East country, according to a report in Reuters. The internal Cisco investigation also found that ZTE had agreed to sell millions of dollars worth of Cisco switches and other technologies to a consortium that owns the Iranian company.

The news regarding Cisco comes the same day the U.S. House Intelligence Committee released a report saying that ZTE and another Chinese telecommunications equipment manufacturer, Huawei, posed a security risk to the United States because of possible ties to the Chinese government. Committee members suggested that U.S. companies should not deal with ZTE or Huawei when looking for telecommunications and networking equipment. In addition, federal government agencies with sensitive data should always stay away from the companies, the committee said.

Cisco has been dealing with questions about both ZTE and Huawei for months. Cisco CEO John Chambers told TheWall Street Journal in April that Huawei—and not Juniper Networks or Hewlett-Packard—posed the biggest threat to his company. That came after Huawei made a significant push into the U.S. market last year. It echoed comments he made a year ago.

"Huawei, it's going to be a tough one," Chambers said. "Those first three [Juniper, HP and Avaya], I think we have a good chance of completely distancing them and leaving them behind, and I measure our success on whether we do that or not. Huawei is going to be a very tough long-term competitor.”

More recently, both Huawei and ZTE have been in the cross hairs. Reuters said that in a recent interview, Chambers would not discuss his company’s investigation into ZTE, but added that Cisco wouldn’t tolerate “any direct or indirect" sales of its equipment to Iran or other countries under U.S. sanctions. "And when that occurs, we step up and deal with it very firmly,” he said. “So I think you can assume that you will not see that happen again."

According to Reuters, Cisco and ZTE began partnering about seven years ago, and Cisco ramped up the alliance five years ago in an effort to compete with Huawei in the Chinese market and other emerging markets. Huawei had been helped by undercutting Cisco on price. According to a former Cisco executive who spoke to the news organization, ZTE would license technology from Cisco and build the products locally. That worked in China, but the two companies disagreed when it came to developing products together and expanding into new markets. There also was disagreement over the U.S. market.

Even though the partnership had waned by 2010, ZTE still resold Cisco products, and still did business in Iran. A ZTE executive in the United States told investigators in an affidavit that the company had tried covering up its dealings with Iran, going so far as to shred documents.

A ZTE spokesman told Reuters that his company was “highly concerned with the matter and is communicating with Cisco.” He added that ZTE is working with U.S. investigators in their investigation about its ties with Iran.

Issues with Huawei have continued to crop up with Cisco. Chambers and other executives have said that Huawei doesn’t play by the rules—comments that have drawn sharp rebukes from Huawei officials—and have highlighted questions about its relationship with the Chinese government. In May, Rob Lloyd—who on Oct. 4 was named one of two presidents of Cisco and is seen as a possible successor to Chambers—raised the issue of Huawei’s integrity.

“[In] today's cloud-centric world, integrity is everything,” Lloyd said in a conference call. “The privacy of information, how data is protected, is foremost in our customers' mind in a cloud-centric world. That's not the forte of Huawei. And as they examine partnerships to enter markets around the world, this integrity gap is clearly recognized by our partners, and I think … that's being reflected in their lack of success so far in penetrating the value channels that Cisco takes to market.”

In September, Huawei officials said they were expanding their competition against Cisco into the immersive telepresence market.